ICRA projects the year-on-year (YoY) growth in the consumption of petrol or motor spirit (MS) and high-speed diesel (HSD) in FY2022 at ~14% and ~10%, respectively, on the low base of FY2021.
Benefitting from the revival in consumption of fuels, the aggregate revenue generated from the cesses imposed by the Government of India (GoI) on MS and HSD is estimated by ICRA to expand by ~13% or Rs. 0.4 trillion to Rs. 3.6 trillion in FY2022.
If this additional revenue of Rs. 0.4 trillion is foregone, it can support a reduction in cesses by Rs. 4.5/litre each on MS and HSD, the rating agency opined. Such a revenue-neutral cut in cesses on fuels would shave off a modest 10 bps from ICRA’s forecast of 5.25% for the CPI inflation for July 2021, in terms of the first-round impact, with a similar second round impact likely with a moderate lag.
According to Ms. Aditi Nayar, Chief Economist, ICRA Ltd: “Benefitting from the anticipated rise in mobility and economic recovery aided by an acceleration of the coverage of Covid-19 vaccines, ICRA has forecast the YoY growth in the consumption of MS and HSD in FY2022 at ~14% and ~10%, respectively, on the low base of FY2021. Our forecasts suggest that consumption in FY2022, relative to the pre-Covid level of FY2020, will be 6.7% higher for MS, and 3.3% lower for HSD.”
“Higher consumption of fuels should support a rise in the indirect taxes levied on them, affording a window for a partial reversal in the cess hikes that were imposed last year. Our calculations suggest that the cesses levied on MS and HSD could be reduced by Rs. 4.5/litre each, while maintaining the total cess revenues of the GoI on these fuels in FY2022 at the FY2021 level. Such a cut in the cess rates would offer some relief to household budgets and ease the inflationary pressures related to the rising global crude oil prices,” added Ms. Nayar.
The favourable prospects of a global economic rebound brought on by the vaccine rollout optimism, have resulted in a nearly uninterrupted increase in the international crude oil prices since January 2021.
Reflecting this, a weaker INR, higher cesses imposed by the GoI since March 2020 and the increase in Value Added Tax (VAT) rates by more than three-fourths of the state governments in 2020, have seen the average retail selling prices (RSP) of MS and HSD in the four metro cities increase to record-high levels of Rs. 99.54/litre and Rs. 92.03/litre, respectively, as on June 25, 2021.
Given the current scenario where domestic sentiment demand has been singed by the impact of the second wave of Covid-19, the all-time high retail prices of fuels are both weighing upon disposable incomes and consumption, and feeding into inflationary pressures. In May 2021, the CPI inflation rose to 6.3%, exceeding the upper threshold of the Monetary Policy Committee’s (MPC’s) medium term target of 2-6%.
In the last three Monetary Policy reviews (Feb 2021, Apr 2021 and June 2021) the MPC has highlighted the inflationary pressures created by the higher cesses and VAT rates announced by the Centre and the state governments last year, and the need to unwind the same to ease the cost push pressures.
“A reduction in fuel prices generated by a cut in the cesses imposed, would help dampen the inflationary pressures, and prevent inflationary expectations from getting entrenched at a higher level, thereby affording Monetary Policy continued space to support a revival in growth. Lower fuel prices would also ease the pressure on disposable incomes, allowing for a modestly faster revival in consumer sentiment and spending,” added Ms. Nayar.
Assuming that the total cesses on unbranded MS and HSD remain unchanged at Rs. 32.9/litre and Rs. 31.8/litre, respectively, the aggregate revenue from such duties on these two fuels is projected by ICRA to expand by ~13% or Rs. 0.4 trillion to Rs. 3.6 trillion in FY2022 from Rs. 3.2 trillion in FY2021 (ICRA est). Based on the actual volumes in April-May 2021 and the expected level for June 2021, ICRA estimates the GoI’s cess revenues from MS and HSD in Q1 FY2022 at Rs. 0.8 trillion. To maintain the total cess revenues in FY2022 at the estimated level of Rs. 3.2 trillion for FY2021, collections of Rs. 2.4 trillion are required in the remaining three quarters of this fiscal.
The rating agency’s calculations suggest that the expected consumption of fuels can generate revenues of this magnitude in the next nine months, even with a reduction in the cesses on MS and HSD by Rs. 4.5/litre each.
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